I lead a multi-family office and trust administration firm, having earned a doctoral degree in finance, a law degree and an advanced degree in taxation. I have over 20 years of experience in all aspects of managing and administering the business and investment interests of families--including domestic and international tax and estate planning, as well as business transition planning.

Is Gold Really Worth $40,000 Per Ounce?

My mom – who is going on 95 years old – grew up on a farm in rural California. Her home did not have electricity and she studied by kerosene lantern. An uncle who lived in the city came for a visit and gave my mom and her two siblings a rectangular piece of paper measuring about 3 inches by 6 inches. It had pretty pictures printed on each side. Based on his demeanor, she could tell that her uncle thought it was a special gift and expected some level of reaction from her, her sister, and her brother. But, there was none. They held in their hands a novelty and they were more filled with curiosity than excitement. My mom, her sister, and her brother asked, “What is it?” Their uncle replied, “Why, that’s a dollar bill. That’s money.” The kids began to laugh, “Who are you trying to kid? That’s not money. Real money is made out of gold and silver.” When my mom told me that story, it reminded me of one particular scene in the movie “Old Yeller.”

It so happened that paper money was a rarity in the rural parts of California – and perhaps many other locales – during the early 1920s and prior. But, on a technical level, my mom and her siblings were correct. “Real money” is in fact made of gold or silver or some other commonly accepted store of value . . . not paper.

Some believe that the paper money printed by a government should be backed by real money. At a time, one could exchange one’s paper money for real money, whether gold or silver. Then, the United States government ceased exchanging paper money for gold and silver and instead issued gold certificates and silver certificates. In essence, although you can’t get gold or silver for your paper money, you can sleep well knowing that your paper money is backed by gold and silver that the United States government is holding. Then that stopped.

Recently, there has been quite a bit of volatility in the dollar price of gold. It certainly can’t be that the fundamental value of the United States dollar is experiencing wide swings. We don’t see the dollar price of bacon or bread or a car wildly gyrating. But, given that gold is money, in a sort of cross-currency context, the prices of bacon, bread, and a car ARE wildly gyrating . . . relative to gold. Of course, history would suggest to us that the price of bacon, bread, a car, gold or most anything should be stable relative to each other over the long run. So, it would seem that the recent price swings in gold are driven by speculation as opposed to fundamentals.

So, what should the price of gold be in dollar terms? In prior articles, we’ve discussed this in terms of expansion of the money supply relative to the expansion of gross domestic product. That analysis suggested the price of gold should be somewhere around $1600 to $1800 per ounce. However, if we expect each dollar in the money supply to be backed by the gold stock of the United States government, as some believe, we are in for a big surprise.

According to a report released by the Federal Reserve last week, the M2 money supply is about $10.5 trillion. The amount of gold held by the United States government is approximately 260 million ounces. Doing the math, that translates to north of $40,000 per ounce. This is too difficult to even comprehend. But, whatever the real number might be, it seems that it is above the current $1200 area that gold in currently trading. The SPDR Gold Trust (ticker symbol NYSE:GLD) is an exchange traded fund that holds gold; its shares are very liquid. We think gold will be moving up and we’ve positioned our clients accordingly.

Post Your Comment

Post Your Reply

Forbes writers have the ability to call out member comments they find particularly interesting. Called-out comments are highlighted across the Forbes network. You'll be notified if your comment is called out.

To be certain, it is not the position that drives the analysis, it is the analysis that drives the position.

Prior to about 1980, global production of gold stayed within the range of 1200 to 1500 tons per year. Starting in the early 1980s — as a result of the spike in the price of gold at that time — until about 1992, global production of gold moved consistently up to about 2200 tons per year. That was a clear expansion of production based on price.

For the past 20 years, global production of gold has been in the 2200 to 2700 tons per year range. Certainly every asset varies in price and every asset has a 52-week hi/lo. But, 2012 cannot be seen as rally year for gold. It’s price ended the year at more or less the level that it started the year. As for production, 2012 production was only modestly higher than that in 2011 and roughly the same as in 2001. In fact, during the entire rise in the price of gold during the past decade, production has remained in that 2200 to 2700 range. Production has NOT seen the type of rise that was seen after the 1980 peak.

Industry analysts have noted that production costs have been rising and that the gold mining industry has become more fragmented. As such, they believe, operators will be more likely to shut a mine and do so more quickly should the price of gold decline (as it is) than they might have previously.

In the end, one looks at the range of available investments and asks a simple question: is X priced in the market lower than what I believe X’s intrinsic economic value is? For gold, we believe it is. We believe it is for a number of different reasons. Could we be wrong? Sure. But, we believe we’re correct. Certainly not $40,000. But, somewhere north of $1200. That being said, we respect others’ positions that gold should decline.

The $40,000/oz figure is likely too low. The government refuses to allow a proper audit of the fort knox gold despite the fact this has not been properly assayed and audited since the 50′s. Germany asked for the repatriation of a mere fraction of its gold stored at the federal reserve and has been denied the return of even that small amount of gold for 7 years. It’s extremely likely the gold the US claims to own either does not exist or has been lent out & sold. By this time, it’s likely been smelted into kilogram bars and exported to china never to be seen again. At best, an audit of fort knox will reveal only a pile of paper receipts. At worst, it will reveal a bunch of gold coated tungsten bars. Otherwise, what’s the big deal? Return of gold in the quantity germany is requesting should take at most a few days, if the US actually has the gold. And there is no cogent reason for refusing an audit and assay of US gold stores IF that gold actually exists as claimed.

The United States government has two primary storage facilities for gold: Fort Knox and a facility in New York City. Fort Knox holds only gold owned by the United State government. The facility in New York City holds gold owned by the United States and a number of other countries.

The last time the gold held at Fort Knox was audited was in the early 1970s. After President Nixon suspended the gold standard in 1971, there was great concern that the United States government suspended the gold standard because all the gold was gone. This particular audit was well-publicized and every single bar of gold was accounted for. In spite of this, rumors persist. The likelihood is that the gold that is supposed to be at Fort Knox is in fact at Fort Knox. That being said, just because the gold that is supposed to be at Fort Knox is in fact there does not mean that it is still owned by the United States government. There are those individuals who pay closer scrutiny to the government’s finances that me who believe that at least some of the gold at Fort Knox has been pledged to satisfy certain obligations. I have not seen data on and have not studied this issue to comment on it. But, if it were true, we would have a very difficult set of circumstances.

As for the New York City facility, that is accounted for on a regular basis. Governments regularly settle trade imbalances among each other via transferring gold from one’s own cage at this facility to another government’s cage. Individual bars are physically counted and moved. It is a very business-like process. Recently, Germany decided to bring back home about one-third of the gold it had stored in this facility. To my knowledge, nothing prevented them from doing so.

When german officials attempted to physically see their gold at the new york fed facility they were denied access. When Germany asked for the return of their gold they were told they could have it back in 7 years. Why? It seems to me a rather simple process that takes a day perhaps two, if the gold really exists at the facility. Jumbojets pull up at JFK, gold loaded onto jumbo jets, jets take off.

Why should this take 7 years? When one puts this in the context of a federal reserve that fights tooth and nail against an audit of the US government gold, and given the principle of Occam’s Razor (the simplest explanation tends to be the correct one), the most plausible explanation is that the gold simply does not exist in a place where it can be loaded onto those jumbojets and our government needs 7 years to mine the gold.

“But, on a technical level, my mom and her siblings were correct. “Real money” is in fact made of gold or silver or some other commonly accepted store of value . . . not paper.”

This single statement neatly contradicts itself and illustrates the invalidity of your premise. “Real money” is ANYTHING that can meaningfully be regarded as a store of value. Whether that is (mostly) useless shinny metal, digital “coins”, Fed notes, salt, sea shells….

Gold might increase or decrease in relative value, but so will Picasso painting, baseball cards, IBM stock, and original printings of the declaration of independence. Those are all “commonly accepted store of value”. The Fed printing notes may cause those items to suddenly be worth more of those freshly printed notes, but then again, maybe not. People might stop caring about baseball cards, or shinny metal.

I do the analysis another way. Since all currencies ought to be backed by gold, we need to look at global above ground supplies of gold, which is acknowledged to be in the vicinity of 6 billion ounces. World population is about 7 billion. Therefore, each person’s share of the world’s gold supply, if it was to be melted from jewelry, etc, would be less than one ounce. If all the world’s gold was held by only US residents, each person’s share would still be under 19 ounces. Your goal should be to have at least 4 times “your share” of the latter calculation. You don’t have to get all the gold, but you don’t want to be the guy who has to pay “full price” to get any of his share of the gold, when the bond market implodes and people look for alternate safe stores of value for whatever decimated remains of money they were able to pull out of the smoldering ruins.

I am inclined to agree with Todd. In fact i did some some research on this subject. According to the World Gold Council’s data, U.S. is currently holding 8,133.5 tonnes of gold as of July 2013, which is 286.9 million ounces of gold. For gold to back U.S. base money, which is M2 data, Gold needs that amount to cover the base money as it did in 1934 and 1980. But does gold suppose to back only M2 or its role is to back all the currency and debt in our economy. Currently the total market credit debt hits above $52 trillion mark. Mr Seitz, we need not to produce more gold annually, in fact we have more than sufficient gold to back our currency supply. How about we price gold in terms of atoms of gold instead of ounces. The Avogadro constant is 6.02214129(27)×1023 that way one ounce of gold can back ALL the currency in the whole planet. If you are interested in more info, i have post an article on my blog http://www.corruptionofrealmoney.com/displayfullarticles.php?id=15#.UduIbm1afOU

There are lots of ways to calculate a theoretical price per ounce of gold. Here are just a few: 1. Since 1971 was the watershed year when we were all forced to recognize that that dollar bill your wise-beyond-her-years grandma recognized wasn’t real money, it was money just because our federal government said it was, using the CPI index, I calculated the 2013 inflation adjusted price of gold based on the last official price (1973) of $43.22 per ounce. That’s $226.75. 2. Then I looked at the 2013 price of gold adjusted for inflation from 1934 when the official price was set to $35 per ounce. That’s $608.44. 3. Then I tried looking at the change in M2 from 1973 to 2013 adjusting the $43.22 price according to that ratio. That’s $543.46. Well, that didn’t help. 4. Since, under our current monetary system, all money is created by debt and since our national debt is a major part of the debt that creates the money, I looked at the 2013 price of gold adjusting the 1973 price of $43.22 for the growth in debt from 1973. That’s $1510.10. 5. That last one was pretty good. Let’s do the same scenario except adjust using the national debt and $35 gold price from 1934. Wow! That’s a whopping $20,826.30. But we’re still only halfway to your $40,000+ per ounce. 6. One more try. Go back to the debt of 1930 and the gold price of $20 per ounce. That’s $20,082.50.

The winner and still champ is still your spreading out M2 over the 260 million ounces. Altogether, it seems to me that the federal government and the Fed have been doing a lot of creative accounting over the years. Or maybe, it’s that understanding trillions of dollars of money that’s not really money is really beyond us.

Someone once said, “There is profit in confusion.” To that, I added, “But only to the one that’s not confused.” I wonder. Is there anybody that’s not confused? Who could it be?

It’s good to see someone crunching numbers as opposed to subjective commentary. You are to be commended.

Now, let’s look at your analysis of the growth of the money supply from the early 1970s. You took the growth of the money supply since then to the present and multiplied that factor by the prior price of gold and arrived at $1510 value in 2013. If one were to do the same analysis using the early 1980s at the starting point, you’d arrive at somewhere around $1600 to $1800. It seems that the fair value of gold has historically tracked growth in the money supply — sometimes higher and sometime lower.

Thus, if an investor were to ask what the fair value of gold is, in the same manner that Warren Buffett might ask what the fair value of a stock is, an investor would want to buy gold when its market price is below that fair value. Speculators can and do drive the price of stocks and gold and anything else one can name higher or lower than that fair value. Based on your calculation and mine, let’s say that the fair value of gold is somewhere between $1500 and $2000 per ounce. We might never know what the number is exactly but we can have a general sense. If gold’s market price is around $1200, it would seem that gold is a buy.

As the U.S. government has expanded its debt during the past 4 or 5 years, look what has happened to the money supply. The Fed’s quantitative easing is simply the monetizing of U.S. government debt . . . it’s pumping dollar after dollar into the money supply. Look, we have paper, ink, and electricity to run those printing presses. Now consider to what extent the money supply will grow over the next few years. Consider how much additional debt the U.S. government will incur/monetize over the next 10 years. IF the Congressional Republicans were to get their way, the budget will be balanced in 10 years. Between now and then, $4 trillion would likely be added to total debt. And, that’s the optimistic scenario.

So, in what direction might you guess the price of gold is headed over the next ten years?

Okay average Joe here. My issue is with the amount of gold period. As we all know gold is in everything phones,televisions, computers even hearing aides. Even if there is a small amount of gold in each product say a thousandth of an ounce. If you were to look at one company who sells products for example Samsung. How many devices or products with gold inside do they sell? To simplify that more how many cell phones have they produced since opening? Say we round down to a billion. 1,000,000,000 • .001= 10,000,000 oz of gold. And that is one phone company given a very low ball estimate of devices produced and gold used per device.

I see a really serious problem in this discussion that boils down to an almost interchangeable use of the word “price” and the word “value.” The price of something is always relative to some other thing and it doesn’t matter what the value of the thing compared to is constant or not. That’s how we say that the price of such and such is $10 today, but the price of the exact same thing was only $5 ten years ago. We recognize or we should recognize that the value of that thing cannot have changed. It’s the same exact thing. Something must have changed about a thing to increase or decrease it’s value. But where the thing has no change in value, then its price change has to do with perceptions. It could be the perception of the value of the currency, in this case dollars. Or it could be a change in perception of the value of the thing itself. And perception is reality for the one perceiving.

Confused? Who wouldn’t be? I actually liked it better when I could blithely go along assuming that a dollar was a dollar was a dollar and I really believed in the phrase, “sound as a dollar.” I am now, however, floating around in a sea of multi-varied perceptions about price and value and barely have my nose above water. And the waves are getting higher and higher. When I consider things like the variation in price for unimproved land that has no improvement or change of any kind on any land within many miles, the exchange rates between the various currencies, stock prices and stock market indices, even interest rates, and other things that really should be constant in value, certainly on the short term, I realize that there is no way that I will be able to put my feet down and touch bottom, that is, have an absolute measure of value. That said, the Consumer Price Index is perhaps the closest thing to a life preserver for me. I may not be able to touch bottom, but at least, I’ve got a better chance of not drowning.

Back to gold. Since it’s all a matter of perceptions as to the value of gold or the value of a dollar (or any other currency), then the price at any given time will be determined through the perceptions of the people who buy and sell it and the price that they agree to. Since the basis of price IS ONLY perception, then the other things to determine price that have been mentioned: production, amount in Ft. Knox vs. M2, national debt at different times, CPI, and so on are good and interesting arguments, but none of them is the RIGHT answer. The ONLY right price is the price that a buyer and a seller agree to and that price is only good for the one transaction.

That said, I wish you well in your search for a buyer who will agree to pay you $40,000 per ounce. Perhaps you could start negotiations at that price, then let him haggle you down to $4,000 per ounce. My, my! That’s a 90% discount. Anybody ought to be interested in buying gold for ten cents on the dollar, even considering inflation.

I hate to remind anyone but there is no circulation of Gold or Silver coin to speak of and we are stuck with that debt based instrument known as a Dollar but which is in fact the “Federal Reserve Note”. Even the old US notes we used to occasionally get are no longer available. For these reasons I submit that the instability is in the Federal Reserve Notes not in the commodity that we purchase with these notes. As the saying goes the printing presses run day and night and we can only work so many hours a day. That instability is the result of doubling and more of the notes themselves causing more and more notes to chase the same and perhaps even a less goods in the market each day.